VZCZCXRO6243
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHVI #1715/01 1771554
ZNR UUUUU ZZH
R 261554Z JUN 07
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 7759
INFO RUCNMEM/EU MEMBER STATES
RUEATRS/DEPT OF TREASURY WASHDC
RUEKJCS/SECDEF WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 VIENNA 001715 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR OASIA/ICB/VIMAL ATUKORALA 
TREASURY PLEASE PASS TO OCC/EILEEN SIEGEL 
TREASURY PLEASE PASS TO FEDERAL RESERVE 
SECDEF FOR OSD/ISP/EUR 
USDOC FOR OITA 
USDOC FOR 4212/MAC/EUR/OWE/PDACHER 
PARIS ALSO FOR USOECD 
 
E.O. 12958: N/A 
TAGS: PGOV ECON EFIN AU
SUBJECT:  GOA'S 2007 AND 2008 BUDGETS - ANALYSIS AND OUTLOOK 
 
REFS:  A) VIENNA 0979  B) VIENNA 0088  C) VIENNA 0187 
 
Summary 
------- 
 
¶1.  The coalition government's 2007 and 2008 budgets foresee federal 
deficits of 1.3% and 1.2% of GDP, respectively.  The budgets 
represent small steps towards a balanced budget, a goal that the GoA 
still maintains.  However, the GoA now expects to achieve a balanced 
budget only by 2010.  Finance Minister Wilhelm Molterer has ruled 
out tax cuts in the short-term, pledging to use windfall tax 
revenues from stronger than expected economic growth (3.0%) in 2007 
to reduce the budget deficit.  The Austrian National Bank, the EU 
Commission, and the IMF have criticized the slow progress towards a 
balanced budget given robust economic growth.  Progress on 
administrative reform remains crucial for meaningful deficit 
reduction.  End Summary. 
 
 
The 2007 and 2008 Budgets 
------------------------- 
 
¶2.  With the votes of the governing coalition parties - the Social 
Democratic Party and People's Party - Parliament recently approved 
the GoA's budgets for 2007 and 2008.  The October 2006 parliamentary 
elections and subsequent coalition negotiations delayed the 
submission of the 2007 budget.  Since January 1, the GoA had been 
operating under a continuing resolution.  Although the GoA normally 
presents an out-year budget in the autumn, it decided to submit the 
2008 budget now to minimize ongoing political skirmishing over 
specific budget items. 
 
¶3.  The 2007 budget projects revenues of Euro 65.7 billion ($88.8 
billion at the current exchange rate of $1.35 for Euro 1.00), 
expenditures of Euro 69.6 billion ($94.0 billion), and a deficit of 
Euro 3.9 million ($5.2 million).  The 2008 budget projects revenues 
of Euro 66.9 billion ($90.4 billion), expenditures of Euro 69.9 
billion ($94.5 billion), and a deficit of Euro 3.0 million ($4.1 
million).  The federal budget deficit, according to the EMU's 
Maastricht definition, will be 1.3% of GDP in 2007 (1.5% in 2006) 
and 1.2% in 2008.  Pursuant to the GoA's 2006-2010 Domestic 
Stability Pact, state governments and other public entities should 
produce a combined surplus of 0.4-0.5% of GDP, for a total public 
sector deficit of 0.9% of GDP in 2007 and 0.7% in 2008. 
 
¶4.  Federal government debt should rise from Euro 145.3 billion 
($196.4 billion) at the end of 2006 to Euro 152.8 billion ($206.5 
billion) in 2008, equivalent to 56.7% of GDP.  The consolidated 
public sector debt (encompassing all levels of government, according 
to the EMU's Maastricht definition) is projected to sink from 62.2% 
of GDP in 2006 to 59.9% in 2008. 
 
¶5.  The 2007 and 2008 budgets are based on the Austrian Institute 
for Economic Research's (WIFO) economic projections from December 
2006 (ref B).  WIFO forecast GDP growth of 2.7% in 2007 and 2.3% in 
2008, with unemployment rates of 4.6% and 4.5%.  However, subsequent 
forecasts in March (ref A) are more optimistic, indicating real GDP 
growth of 3.0% in 2007 and 2.7% in 2008, and unemployment rates of 
4.2% and 4.1%. 
 
 
Line item highlights 
-------------------- 
 
Defense 
------- 
 
¶6.  The MoD will receive a 24.3% increase in its budget to Euro 2.25 
billion in 2007, compared to Euro 1.73 billion in 2006.  However, 
the defense budget will decrease by 9.5% in 2008 to Euro 2.04 
billion.  In the 2007 budget, Euro 1.1 billion are for personnel, 
Euro 455 million for operations, and Euro 697 million for 
investments, of which Euro 467 million are for the first payments of 
the 18 new interceptors.  The defense budget equals 0.84% of 2007 
projected GDP (0.68% in 2006) and 0.73% of 2008 forecasted GDP. 
Excluding the expenditures for the Eurofighters, the MoD budget 
would only be Euro 1.78 billion in 2007 and Euro 1.79 billion in 
2008, or 0.66% and 0.64% of GDP, respectively. 
 
EU Contributions 
---------------- 
 
VIENNA 00001715  002 OF 002 
 
 
 
¶7.  The budget includes Austrian contributions to the EU in the 
amount of Euro 2.4 billion in 2007 and Euro 2.5 billion in 2008. 
Return payments from the EU, e.g., for agriculture and structural 
support, should amount to Euro 1.8 billion in both years.  Austria's 
net contributions will therefore be approximately Euro 558 million 
in 2007 and Euro 688 million in 2008. 
 
Civil Service, Pensions, and Social Spending 
-------------------------------------------- 
 
¶8.  In line with election promises to hire additional police and 
teachers, the number of civil service positions will increase by 
6,000 to 136,600 in 2007 and fall slightly in 2008 to 136,000.  GoA 
expenditures for civil service salaries will amount to Euro 8.0 
billion in both 2007 and 2008.  In addition, the GoA has to pay for 
civil service pensions and for pensions of outsourced former civil 
servants of the federal railroad, the post and telecom and other 
privatized companies.  The federal government also has to refund 
state governments for teachers' salaries and pensions.  GoA 
expenditures on active personnel will be Euro 11.1 billion in 2007 
and Euro 11.2 billion in 2008.  Civil service pensions, including 
outsourced and refunds, will reach Euro 8.1 billion in 2007 and Euro 
8.3 billion in 2008.  Total pension expenditures will be Euro 19.3 
billion in 2007 and Euro 19.5 billion in 2008, or almost 28% of 
total budget expenditures. 
 
¶9.  In addition to the above mentioned GoA expenses for civil 
service pensions, the GoA will contribute Euro 6.5 billion in 2007 
and Euro 6.8 billion in 2008 to the social insurance system for 
pensions.  The GoA's total social spending, excluding civil service 
expenditures, will be Euro 23.5 billion in 2007 and Euro 23.6 
billion in 2008, almost 34% of all budget expenditures. 
 
 
Outlook-2009 and Beyond 
----------------------- 
 
¶10.  In out-years, the GoA aims to reduce the consolidated public 
sector deficit to 0.2% in 2009, with a surplus of 0.4% in 2010. The 
consolidated public sector debt should ease from 62.2% of GDP in 
2006 to 56.8% in 2010.  Despite these optimistic projections, the EU 
Commission recently criticized Austria's slow progress towards a 
balanced budget, given current robust economic cycle.  The IMF also 
recently criticized the GoA's limited short-term consolidation 
efforts and the delay in its aim to achieve a balanced budget from 
2008 to 2010.  The IMF recommended streamlining within the various 
levels of government.  Austrian National Bank Governor Klaus 
Liebscher has also seconded the criticism from the EU Commission and 
the IMF regarding modest deficit reduction efforts.  Liebsher called 
for more progress on administrative reform and warned against reform 
standstill in view of ongoing globalization trends and the looming 
budgetary challenges of an ageing society. 
 
¶11.  Vice-Chancellor and Finance Minister Wilhelm Molterer announced 
that he will use windfall tax revenues from the better than expected 
economic growth for deficit reduction, ruling out income or 
corporate tax cuts without a consolidated budget.  Molterer added 
that, with strong tax revenues, the GoA hopes to implement a tax cut 
in 2010, while achieving a balanced budget. 
 
 
Comment 
------- 
 
¶12.  The GoA's budgets for 2007 and 2008 represent a trade-off 
between slower deficit reduction and additional GoA expenditures for 
education, and science and research.  The 2007 and 2008 budgets are 
further small steps towards a balanced budget.  However, the GoA 
continues to postpone the timeline for a balanced budget.  To 
achieve a balanced budget by 2010, the GoA will need to slash 
spending in 2009 and 2010, just as economic growth and tax revenues 
should slow.  To achieve meaningful deficit reduction, progress on 
administrative reform appears crucial, although this will require 
political fortitude. 
 
MCCAW